Merrill’s Patrick Dwyer Reads the Numbers

By

Steve Garmhausen

Feb. 27, 2015 9:28 p.m. ET

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Patrick Dwyer loves to study the past: Armed with a dual degree in history and economics from Providence College, he is particularly interested in Chinese history. But when it comes to investing, Dwyer, 46, knows that the past isn’t always a useful guide to the future.

Long-term Treasuries are a case in point—expecting their historical 5% returns to continue in the next few years, he says, is unrealistic. “If the 10-year Treasury is at 1.7% today, it’s not safe to assume the rate of return is 5%,” he says.

Dwyer, whose Merrill Lynch Private Banking and Investment Group team manages $2.76 billion, doesn’t like to assume much of anything when it comes to investing. While many advisors construct portfolios using historical averages, the Miami-based advisor bases his recommendations on current probabilities, arrived at through painstaking research. “We do capital-market analysis and work backward into asset allocation,” he explains.

For example, he currently builds client portfolios based on an 80% likelihood that stock returns will average 5% a year over 10 years, and a 50% chance that they’ll return 7.8%.

His clients appreciate such precision. They typically invest at least $10 million, and they’re interested not in simply beating the market, but in achieving specific rates of return on their investments.

A NEW JERSEY NATIVE, Dwyer set up shop in Florida 20 years ago “basically because of a girl,” he says. The girl in question is Marisa, now his wife, whom Dwyer met while he earned his M.B.A. at the University of Miami.

These days, Dwyer is telling his clients that low interest rates could persist for quite a while, and that healthy allocations to stocks will be critical for earning decent returns.

Just as importantly, says Dwyer, investors need to stay in the stock market because of volatility risk. Given today’s frequent zigzags, it’s conceivable that a year’s worth of returns could occur within a matter of weeks or even days—and being on the sidelines would mean missing the gains.

Today, one of the best opportunities out there is alternatives, says Dwyer—not the investments themselves but the stocks of the managers. “We’re moving some money out of alternatives, and into alternative [investing] companies,” he explains.

Alternative-investment managers have been going public for the past several years.

Some of these companies’ stocks are trading at steep discounts to those of publicly traded mutual fund companies, Dwyer says. Part of the reason is that they have a limited track record, and also partly because the companies’ revenues tend to arrive in chunks, rather than in a smooth stream.

Dwyer sees the segment as compelling because he expects the same sort of growth and consolidation that the mutual fund industry went through years ago. “A few of these companies will grow into multi-trillion-dollar asset magnets over the next decade,” he predicts.

ONE BET THAT Dwyer shuns is the so-called deflation trade. With the global economy struggling to fend off deflation, many investors have been dumping assets that do well in periods of economic growth and inflation, including commodities and materials stocks.

Dwyer argues that a “dangerous consensus” has been taking shape, and that jumping on the deflation bandwagon is risky because that consensus can reverse direction at any time. “This is something where you could potentially earn a little, but lose a lot,” he says.

“Eighty percent of the world is at zero-percent interest rates, and Europe is now dumping more money in,” he adds, alluding to the region’s new quantitative-easing program. “You basically have to decide whether you want to bet against central banks who want inflation.”

An outdoor enthusiast, Dwyer enjoys eight-hour climbs in the mountains of northern Colorado. The qualities required for these ascents—patience and fortitude, among them—can help investors succeed, the financial advisor says.

Stock gains figure to be modest for the foreseeable future, he explains. That means investors can’t afford to lose even a sliver of return through the taxes and fees associated with too-active trading. “If returns are going to be low, then tax efficiency is key,” Dwyer observes.

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